Tuesday, December 13, 2016

Wisconsin has long been known as the epicenter of America’s beer scene. Wisconsin has been home to iconic beer giants like Pabst, Miller, Schlitz and Blatz, and while the mega bottlers romanticized by Laverne and Shirley are still around, it is the meteoric rise of craft brewers that is changing the marketplace in a dramatic way.

Now making up 12.2 percent of the entire U.S. beer market and generating over $22 billion in sales, craft beer companies have rocketed into the beer drinking scene leaving many of these new brewers scrambling when trying to scale their businesses and meet increasing consumer demands. With craft beer becoming available in more places—from food trucks to fine dining restaurants—brewers will want to invest in the infrastructure to deliver their products to retailers and consumers in an efficient manner. The following are best practices on expanding your craft beer distribution network and can be applied whether you’re trying to start a local brewpub or become a mainstay at Lambeau Field.

Local, Regional and National Brewers

With 121 craft breweries here in Wisconsin already, and more starting every day around the state, craft companies typically fit into three categories based on size: the small local brewpub, the regional brewer and the national production brewery. Each has unique needs when it comes to production and distribution.

The local brewpub typically sells most of its beer on premise or at the brewer’s restaurant. This reduces the need for distribution and allows the brewpub to recognize profits quickly. A regional brewer, on the other hand, typically requires more equipment, such as tanks, as well as a larger amount of real estate to produce and store inventory. The regional brewer might be selling out of a tasting room, with revenue and growth coming through selling their brand into other accounts. Between 2014 and 2015, regional craft breweries grew by nearly a third (31.9 percent) nationally. At a much larger scale, a national production brewery may have several operations and requires a more sophisticated and robust distribution system.

To Grow or Not to Grow
In a market where Wisconsin craft breweries are producing over one million barrels of beer each year—or 7.6 gallons per drinking-age adult—expansion is often a matter of choice rather than survival. Each category of brewery has its advantages and drawbacks, and each has the ability to deliver a good profit. It’s important for investors and owners of breweries to align on objectives when it comes to growth targets and appetite for expansion. Once brewers and investors agree on business objectives, they can set priorities for investment and determine the amount of capital they’ll need to build their infrastructure. If a brewer aims to slowly expand a brewpub, for example, he may not need to purchase a new warehouse to store beer right away; instead, he can gradually scale up distribution. As part of this evaluation process, brewers will also need to consider operational needs to maintain equipment, including maintenance and upgrades.

Breweries like Lakefront Brewery in Milwaukee serve as a great example of knowing their strengths and when to use those strengths to grow. Slow and steady from their founding in 1987, Lakefront grew from just 72 barrels in 1988 to just under 13,000 in 2009. Then Lakefront took advantage of changing beer tastes and the move towards craft beers and production jumped to 45,000 barrels in 2015. Today they are also one of the highest rated brewery tours in the U.S. and operate a beer hall complete with a Friday fish fry and a polka band.

Assessing Where (and How) to Expand

Brewers also need to evaluate where to expand. Craft-centric regions, including San Diego, Colorado and the Pacific Northwest as well as the newer craft hubs of Austin, Atlanta, Chicago and Ashville, have turned into destinations for craft beer tourism. This means that there’s a large market in these locations for craft beer, though there is also a lot of competition. Other areas of opportunity include traditional grocers and convenience stores. While most Wisconsinites would be hard pressed to locate a grocery store or convenience store that doesn’t carry a selection of at least some craft beers, some stores—like Whole Foods—have created their own brewing company that offers select craft beers and produces about 400-500 barrels annually.

A key partnership for craft brewers are beer wholesalers, who support, sell and distribute their product. As the craft beer industry has continued to grow over the last decade, wholesalers have adjusted their business models from supporting a few key suppliers (such as AB or MillerCoors) to now having more than 30 breweries to support, sell and distribute. Wholesalers have also increased the training and size of staff, often deploying craft-only sales teams. Today, brewers have the opportunity to work with large distributors as well as craft-only distributors. Craft beer’s continued growth will be in part due to the commitment and support of these innovative beer wholesalers.

What Works Best for your Craft Beer?

Ultimately, the value for a particular brewer is case dependent. Key factors to consider include quantitative elements (growth rate and profitability), intangible factors (brand awareness), competition (assessing if similar products are in the market), and finally, succession planning based on the end goal (for example, an IPO).

Brewers need to assess if the distribution strategies implemented would support their growth and closely align their financial strategies with their long-term goals.

While craft beers are expected to climb to nearly one-quarter of the U.S. beer market by 2022, and Wisconsinites will not soon turn in their pint glasses for wine glasses, the industry is certainly becoming much more competitive for the next generation of entrepreneurial brewers. At the same time, their ability to secure capital and know they have options in the future has never been better.

Brian Mulvaney is senior vice president for the Beverage Group at Bank of America Merrill Lynch and Drew Slocum is a Global Commercial Banking SVP and Relationship Manager based out of Bank of America Merrill Lynch’s Wisconsin office.